Question

Minden Company introduced a new product last year for which it is trying to find an optimal selling price. Marketing studies suggest that the company can increase sales by 5,000 units for each $2 reduction in the selling price. The company’s present selling price is $97 per unit, and variable expenses are $67 per unit. Fixed expenses are $831,300 per year. The present annual sales volume (at the $97 selling price) is 25,100 units.

Required:

1. What is the present yearly net operating income or loss?

2. What is the present break-even point in unit sales and in dollar sales?

3. Assuming that the marketing studies are correct, what is the maximum annual profit that the company can earn? At how many units and at what selling price per unit would the company generate this profit?

4. What would be the break-even point in unit sales and in dollar sales using the selling price you determined in (3) above (e.g., the selling price at the level of maximum profits)?

Answer 1

				25,100
				total	per unit
1)	Sales			2434700	97
	less :Variable cost			1681700	67
	contribution marging			753000	30
	less:fixed expense			831,300
	Net operating income(loss)			-78,300
	net operating loss		-78,300
2)	Break even point in units			27710
	Break even point in dollars			2687870
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit
3)	units		25,100	30,100	35,100	40,100	45,100	50,100	55,100	60,100
	selling price per unit		97	95	93	91	89	87	85	83
	less:Variable expense		-67	-67	-67	-67	-67	-67	-67	-67
	contribution per unit		30	28	26	24	22	20	18	16
	total contribution margin		753000	842800	912600	962400	992200	1002000	991800	961600
	less:fixed expense		-831,300	-831,300	-831,300	-831,300	-831,300	-831,300	-831,300	-831,300
	net operating income(loss		-78300	11500	81300	131100	160900	170700	160500	130300
		Maimum profit			170700
		number of units			50,100
		selling price			87
4)	Break even point in units			41565
	Break even point in dollars			3616155
	BEP(units)                = fixed cost/contribution margin per unit
	BEP(dollars)              = BEP units * selling price per unit